Basics of M&A transactions in Germany By Jens Hörmann P+P Pöllath & Partners

Issue: China Outbound Investment Guide 2010

Germany is the largest economy in Europe and considered the world’s leading exporter of merchandise, with exports accounting for more than one-third of the national output. The economy in Germany is subject to a legal framework that is more efficient, cost-effective and predictable than commonly reported, with statutory law (instead of case law) providing legal certainty. The World Economic Forum’s Global Competitiveness Report 2008-2009 even showed Germany to be top-ranked in the category of ‘efficiency of legal framework’.

Compared to Anglo-Saxon countries, M&A activities in Germany may not have reached their peak and have obviously suffered from the financial crisis in 2008 and 2009. However, since the end of 2009, the M&A market begins to show signs that it will probably increase again.

This article shall provide a brief general overview of M&A transactions in Germany from a legal perspective.

Share deal vs. Asset deal

When investing in German companies, one can choose either to buy shares in a certain target company or its assets. In general, share deals are seen more often. This is determined by the fact that asset deals are more complicated since any asset to be transferred must be specified in the agreement. In addition, the transfer of agreements from the seller to the purchaser requires the consent of the other contractual party. On such occasions, it can sometimes be observed that the contractual party tries to renegotiate the terms and conditions of the concerned agreement. Further, from a seller’s perspective, a share deal is generally favourable from a tax perspective.

On the other hand, situations may occur in which it is more recommendable to buy assets, e.g. if the target company has filed for insolvency or if the purchaser only wants to buy a certain business unit by way of spin-off. In addition, an asset deal may be advantageous for the purchaser from a tax perspective due to a possible step up.

If the transaction is structured as an asset deal, the employees of the business unit concerned are automatically transferred to the purchaser by operation of law. However, this is provided that each employee is permitted to object to the transfer.

Sale and purchase agreements

Traditionally, commercial agreements under German law are substantially shorter than Anglo-Saxon agreements. To a certain degree, this also applies to sale and purchase agreements (SPA) relating to the acquisition of shares although the influence of Anglo-Saxon legal culture has been significant over recent decades. However, comparatively short German-style documents continue to prevail in many all-equity-financed transactions and in many transactions involving typical German medium-sized companies.

Short German SPAs are possible since most key areas of German corporate and contract law are dominated by extensive statutes. On items like remedies for violation of warranties, and the calculation of damages caused by contributory negligence and delay, in general it is possible to rely on statutory law. Therefore, the wording of the contracts sometimes give little guidance on practical handling issues since it is to be understood within the context of statutory law and general legal principles.

Nevertheless, in general the structure of German law SPAs is similar to standards used elsewhere. Core elements of the SPA are, as in many other jurisdictions, the purchase price and respective adjustment clauses. Since the beginning of the subprime difficulties in 2007, net financial debt and working capital adjustments as of the closing date have again become more frequent. So-called ‘locked box contracts’ have become infrequent, i.e. agreements that provide for a fixed purchase price that is (i) determined based on past figures and (ii) not subject to adjustments. A second major part of a SPA is the paragraph dealing with representations and warranties, which are usually comparable to those used in other jurisdictions.

One major deviation from Anglo-Saxon SPAs is the distinction between the sale and the transfer of shares (or assets), which are described as two separate transactions. The ‘sale’ constitutes only the obligation to transfer the share while the transfer constitutes the actual transfer of ownership (in rem). Thereby, the transfer is usually subject to the closing conditions (such as antitrust clearance) and payment of the purchase price.

Another German peculiarity is that any German law agreement involving the transfer of GmbH shares (see below) or real property must be notarised. This means that the SPA itself and any ancillary agreement related thereto and all annexes (other than lists and tables to which an exception applies) must be read aloud by or in front of a notary. German notary fees are governed by a mandatory non-negotiable fee schedule and are calculated on the basis of the transaction value. Accordingly, they range from €10 (US$13.8) to a maximum amount of approximately €55,000 (US$75,570) (at a transaction value of €60 mio. or more). These fees are customarily borne by the purchaser.

Various share types

Private limited liability company (GmbH)

The form of a GmbH is by far the most frequently used corporation form in Germany. The foundation of a GmbH, as well as the transfer of shares, requires notarisation by a notary public. Provided that the nominal share capital is fully paid in after the foundation of a GmbH and is not repaid, the shareholders of a GmbH are in general not personally liable for the company’s debts. The German Limited Liability Company Act provides for capital maintenance rules pursuant to which it is generally prohibited to repay the nominal share capital to shareholders.

The corporate bodies of a GmbH consist of the management and the shareholder assembly. Under German law, the managing directors may be appointed and removed relatively easily by the shareholders at any time they wish. In addition to the two mandatory bodies, the shareholders of a GmbH can opt to implement an advisory board or a supervisory board. If a certain number of employees are exceeded (500), the foundation of a supervisory board is required by mandatory labour law. The occupation and competences of the supervisory board depend on the number of employees (500/2000).

Stock corporation (AG)

In addition to the GmbH, the second major type of German corporate entity is the AG. The shares in an AG may be, but must not necessarily be, publicly listed. In fact, most of the German AGs are not listed but are privately held by a small number of shareholders.

The legal regime that applies to an AG is considerably stricter than that which applies to a GmbH. As a rule of thumb, the articles of association of an AG may only contain provisions that deviate from those contained in the German Stock Corporation Act if this is expressly permitted. In contrast, the articles of association of a GmbH may contain any provision unless such provision is prohibited under the German Limited Liability Company Act. As a consequence, the flexibility in structuring an AG is quite limited – in particular with respect to its corporate governance.

The three mandatory corporate bodies of an AG are the management board, the supervisory board and the shareholders’ meeting. A major difference to a GmbH is that the management board is not subject to instructions from the shareholders’ meeting or the supervisory board. However, certain restrictions on the powers of representation (internally vis-á-vis the company) may be imposed, e.g. the rules of procedure of the management board.

The members of the supervisory board are elected by the shareholders’ meeting unless employee representatives are required by mandatory law.

The minimum stated share capital of an AG amounts to €50,000 (US$68,850), whereby the minimum nominal amount per share is €1. In contrast to the law governing the GmbH, the sale and transfer of shares in an AG does not require a specific form, i.e. notarisation is also not required. However, according to the articles of association, the transfer of registered shares as opposed to bearer shares may be subject to the consent of the AG.

Any actions with respect to the shares in a listed AG must comply with insider law, the violation of which regularly constitutes a criminal offence.

Partnerships

In addition, different types of partnerships can be seen in Germany of which the limited partnership is common – in particular with a GmbH as general partner (so-called GmbH & Co. KG).

Foreign investment approvals

In addition to antitrust law, if applicable, the acquisition of companies with offices or places of business in Germany by investors with their seats or management outside the EU / European Free Trade Area is partly restricted.

Since 2009, each direct or indirect acquisition of at least 25% of the voting rights of a German company by such an acquirer may be reviewed by the German Ministry of Economics (GMoE) within three months. This begins upon conclusion of the obligation to acquire a company, respectively upon publication of the decision to make a takeover bid or the publication that control was obtained. If the GMoE requests the delivery of documents relating to the acquisition, it has an additional two months to issue orders or prohibit the acquisition in case it endangers the public order or security of the Federal Republic of Germany.

If no concerns exist, each acquirer has the right to issuance of a clearance certificate. The respective application requires a description of the scheduled acquisition and information about the acquirer and its businesses. Clearance certificates will be granted if the GMoE has not instituted review procedures within a period of one month beginning upon receipt of the application.

In case of the acquisition of a German company that manufactures or develops military weapons, cryptographic systems or other defence-related goods, the transaction must be announced to the GMoE as well.

Public financial control

When acquiring shares in German companies, investors are subject to various regulatory requirements if the shares are admitted for trading on regulated markets.

When acquiring or selling shares in companies admitted for trading on a regulated market, and in so doing exceeding or falling below certain thresholds in voting rights (3%, 5%, 10%, 15%, 20%, 25%, 30%, 50%, 75%), any investor must notify the company and the German financial supervisory authority (Bundesanstalt

für Dienstleistungsaufsicht or ‘BaFin’) without undue delay, and at the latest within four trading days. A similar obligation also applies as well to warrants or financial instruments that give an unconditional right to acquire shares in such companies. Voting rights may generally not be exercised if the notification requirement has not been complied with. The suspension may last for six months if the notification was omitted due to gross negligence or willful misconduct.

As of May 31 2009, any purchaser of listed shares up to or exceeding the threshold of 10% must disclose the objects of the purchase and the source of financing to the issuer within 20 trading days. Public tender offers are exempt from such disclosure, as well as purchases by investment companies regulated under the UCITS directive. The issuer is then required to publish such disclosed information to the public.

When acquiring shares in AGs not listed on a regulated market, and which exceed a threshold of more than 25% of the registered share capital, the purchaser must notify the company and the company has to publish such notification.

No similar notification requirements apply to purchases of shares or interest in companies of other legal types such as GmbHs.

Tender offer

If shares in the relevant company are admitted for trading on a regulated market, public tender offers can be made by way of two main types of offers, namely voluntary offers and mandatory offers. Voluntary offers aimed at the acquisition of control over a company are so-called ‘takeover offers’. As opposed thereto, a ‘mandatory offer’ must be made to all outside shareholders upon the acquisition of control in any way other than by a takeover bid. For example, control can be gained through an off-market purchase of shares (block sale), purchases from the stock exchange, subscription in a capital increase, or a merger.

Control is established by directly or indirectly holding 30% or more of the voting rights in the target AG. To determine whether the 30% threshold has been met, the voting rights directly held by shareholder and certain voting rights imputed to him must be combined. For example, voting rights that are owned by a subsidiary – or by a third party for the account of the shareholder – shall be deemed to be voting rights of the relevant shareholder. In particular, the voting rights of a third party with whom a shareholder coordinates its conduct with respect to the AG are imputed to the shareholder (acting in concert). This is with the exception of agreements in individual cases. Coordination between the shareholder and a third party shall be deemed to exist in cases in which they agree on the exercise of voting rights or otherwise act together with the purpose of affecting permanent and significant changes to the company’s business approach.

Once the bidder has decided to make a takeover offer or once the 30% control threshold has been met, the bidder must immediately publish the decision or announce that the control threshold has been met. Thereafter, as a rule, the bidder has a period of four weeks to prepare an offer document containing the full terms of the offer and to submit the document to BaFin for verification. Upon approval of the document by BaFin, the bidder must immediately publish the offer. The acceptance period that starts with the publication may not generally be less than four weeks and not more than 10 weeks. In certain cases, the acceptance period extends by operation of law.

For both voluntary and mandatory offers, the consideration to be offered to all other shareholders must at least be equal to the higher of:

(i) the highest consideration that the bidder (or certain persons related to or acting together with) has granted or promised to pay for the acquisition of shares – during a period of six months preceding publication of the offer document; or

(ii) the weighted average domestic stock market prices of the shares during the three month period preceding publication of the bidder’s decision to make a takeover offer or of the bidder’s attainment of the 30% threshold.

The consideration will be adjusted to a higher price if the bidder (or certain persons related to or acting together with) acquires further shares. This can either be during the acceptance period or, by way of an off-market transaction, within one year after the lapse of the acceptance period – and for a consideration exceeding the value of the consideration specified in the offer. An exception thereto exists for the acquisition of shares in connection with a statutory obligation to grant compensation to shareholders of the target company.

Takeover offers and mandatory offers basically follow the same legal regime. An important deviation, however, is that a mandatory offer may not be made subject to conditions precedent, whereas for voluntary offers conditions precedent are generally permissible. In practice, voluntary offers may sometimes be subject to the achievement of certain acceptance thresholds in order to ensure that a certain percentage of voting rights is obtained.

Based on the fact that a mandatory offer cannot be made subject to conditions precedent, an attempt is often made (and it is possible) to structure the transaction in order to have a voluntary offer rather than a mandatory offer. This may be achieved by a combination of a private transaction comprising 30% or more of the voting rights together with a voluntary offer.

Author biography

Jens Hörmann

Partner

Jens Hörmann is a partner with P+P in Munich and specialises in mergers and acquisitions and private equity. In particular, he focuses on private equity transactions, joint ventures as well as capital markets law. Jens studied law in Konstanz/Germany.

China Solar Dominance ContinuesChina Acquiring Struggling US Solar Companies

http://www.greenchipstocks.com/articles/china-solar-dominance-continues/2015

By Abhishek ShahWednesday, June 27th, 2012

Chinese Scenario

Big Chinese state owned companies are gobbling up financially strained Western solar firms as a massive overcapacity in global solar panel supply (caused by their brethren) drives them to bankruptcy. Note thin film startups like Ascent Solar, Heliovolt have already seen Asian companies taking a controlling equity stake. Now Chinese state owned companies which do not have a big solar presence are buying up these companies to gain access to solar technology which they lack. Recently Hanergy bought Solibro which has one of the best thin film CIGs technology and a 100 MW capacity from bankrupt Q-Cells. Note the

company has been developing this technology for almost a decade and Hanergy has made a killing by buying it for a dirt cheap price (my assumption).

Another big Chinese conglomerate Aiko Solar Energy has bought bankrupt Holland solar company Scheuten Solar after it too was forced into bankruptcy. There are also a number of big State Owned (SOE) Chinese conglomerates that are entering the Solar Panel Industry. These state owned Chinese giants have huge financial muscle and they can internally use the solar panels made by these acquired entities. With the profits and focus of the solar industry shifting to solar system installation, the big players have a huge advantage in terms of size. Only companies with a solid and large balance sheet can make a decent play in the utility scale solar system game as it requires raising large amounts of debt. This is beyond the capabilities of the western solar startups though they have great technology.

The big Chinese groups continue to build huge capacities in the already oversupplied solar industry as they have the backing of the Chinese banks. Hanergy is getting a $5 billion credit line from CDB and is aiming for a 3 GW capacity by the end of the year. Note CDB has given multi-billion credit lines to most big Chinese solar panel companies even as these companies struggle to maintain a market valuation of a couple of hundred million dollars.

LDK Buying Sunways/ Chinese Government Support

Most small German solar companies are almost insolvent and have no hopes of  turnaround. Around 5000 German solar companies have closed according to BSW. Some big German companies like Solon and Solar Millennium have already announced bankruptcy. Note Chinese companies too would have shut down but the state owned Chinese banks are keeping them alive with loans at ridiculous interest rates. LDK  which is buying Sunways is almost insolvent as well with its convertibles trading at less than 50c on the dollar in Singapore. It has more than n$3 billion in debt compared to its market cap of around $600 million. It faces massive losses in the coming quarters and cannot serve the interest payments much less expand. The strong support of the Chinese government for its green companies is keeping them alive. Chinese solar panels have become super cheap due to companies selling at below cost and massive scale. Note all the cheap solar panel brands in the world are Chinese with the exception of First Solar and some Asians.

LDK has managed to spend 22 million Euros despite burning hundred of millions of dollars in cash because it has got the Chinese government trillions backing it. So while Western companies burn and crash, the big crony Chinese companies can expand and acquire.

Global Scenario

Most of the German solar manufacturing industry is finished and it is unlikely that except a couple of them like SM Solar or Wacker will live to see 2013.Q-Cells too should go bankrupt or get consolidated . Note despite European companies shifting factories to Asia, they just can’t compete. Some of the smaller module makers with 20 MW plants have seen huge losses with the equipment not selling for 10 cents on the dollar.

Note the solar glut is not isolated, Chinese mal-invesment has led to a similar overcapacity and crash in the global wind turbine and LED industries as well.

LED Overcapacity

The LED chip industry flourished in China as the government provided capital subsidy to small companies to buy MOCVD tools which help in making these chips. With oversupply, prices have crashed to below costs leading to bankruptcies. China is now seeing the 3rd Green Industry Bubble Bursting with LED chip manufacturers in China going bankrupt in drovers. With massive oversupply and crashing prices, LED chip makers especially the smaller ones are seeing huge losses and shutting down operations. The government like the solar and wind industries now wants the small LED chip makers to go out while retaining the big

ones. Foshan, Silan and others face survival questions while the bigger ones like Sanaan and Elec-Tech keeping adding capacity. Note it is only government support that is leading to this crazy situation that companies are adding equipment even as 50% of the industry equipment lies idle. The industrial overcapacity in China is being acutely felt in the Green Manufacturing Industry as well, where the government policies have been the most supportive.

Investment in Germany (English) Issue: China Outbound Investment Guide 2012

By Oliver Dörfler, Dr Holger Lampe and Maximilian Gröning

KPMG Germany

More and more Chinese companies settle down in Germany and make it the headquarters or operating centre for their business in Europe. Germany is located in the centre of Europe. It is the largest economy in Europe and the largest consumer market within the EU. Germany’s ideal location in the heart of Europe creates a multitude of opportunities for European and international business.

In the following, we would like to outline major legal and tax aspects when making an investment in Germany.

Foreign investment in Germany

Foreign investment is welcome in Germany. There are no substantial restrictions on new foreign investments, permanent currency controls, or administrative controls on such investments. Foreign investors are subject to the same conditions as German investors when obtaining licences or building permits, or applying for and receiving investment incentives.

The July 2006 Takeover Directive Implementation Act amended the Securities Acquisition and Takeover Act (Wertpapiererwerbs – und Übernahmegesetz – WpÜG) to bring it into line with the 2004 EU Takeover Directive.

As the German Federal Cartel Office (Bundeskartellamt) aims to prevent the establishment of dominant market positions, large firms must get an approval by the cartel authority prior to the execution of an acquisition based on certain criteria. M&A transactions above a certain size (essentially, involving companies or corporate groups with a joint worldwide turnover exceeding €500 million (US$666 million)), and including at least one German entity with a turnover exceeding €25 million (US$33 million) and the other entity with a turnover exceeding €5 million, must be cleared by the Federal Cartel Authority. They can be prohibited by this authority if considered to be detrimental to competition. EU antitrust laws may pre-empt German antitrust laws or add to it, depending on the transaction.

Furthermore, Germany reserves the right to interdict participation by foreign investors in German entities outside regulated industries under the German Foreign Trade Act (Außenwirtschaftsgesetz) – for example, the acquisition of interests in German companies and real estate by foreign persons – if it deems the participation to be a threat to national security and/ or public order.

When planning an M&A transaction, labour law considerations should also be taken into account. Under a provision in force in one form or another throughout the EU, the purchaser of a business automatically

takes over all employment relations associated with it. It makes no difference in this respect whether shares or assets are purchased, although questions arise when not all assets of a business are acquired, such as one of several business divisions (branches of activity). Continuation of employment contracts does not ipso facto prevent immediate downsizing following the acquisition, but this must be conducted in accordance with general German labour law legislation. Compared with that of many countries, this favours employees.

Furthermore, Germany has an employee co-determination system for virtually all businesses. The system has several variants, the simplest of which is the works council (Betriebsrat) and involves election by employees. The works council has a variety of rights to be informed and to be heard on personnel and other intra-company matters, and some co-determination rights (where their consent is required).

Employees must make up a third of the supervisory board at corporations with 500 or more employees. Corporations that have not already established a supervisory board according to their articles of association can be forced by the employees/ trade unions to establish such body. In cases where a company exceeds 2,000 employees, 50% of the members of the supervisory board may be appointed by the employees. For calculating the threshold in groups of companies, employees of different domestic German group companies are deemed to be employees of the holding company. Advocates of this system regard it as at least partially responsible for the traditionally good German management-labour relations, and relatively low level of strike activity. However, foreign owners unfamiliar with supervisory boards sometimes consider this to be unusual.

Investment options

When Chinese companies are going to invest in Germany, the most common legal forms are through a GmbH or an AG.

Limited liability company: Gesellschaft mit beschränkter Haftung (GmbH)

The limited liability company (GmbH) is the most common form of business association. It is a corporate entity with its own legal identity, has one or more shareholders, and share capital of at least €25,000 (US$33,000). Shares in GmbHs are not certified. The purchase and transfer of shares in an existing GmbH requires an agreement, which must be recorded in the presence of a qualified notary. The management of a GmbH rests with one or more managing directors appointed by the shareholders. The managing directors are subject to close supervision and control by the shareholders and are generally obliged to respect instructions given to them by way of resolutions of the shareholders’ meeting. A GmbH is not obliged to establish a supervisory board, unless this becomes necessary under applicable labour law (see above). The shareholders control the distribution of net earnings.

Stock corporation: Aktiengesellschaft (AG)

The stock corporation (AG) is also a corporate entity with its own legal identity. The minimum share capital is €50,000. The management structure invariably consists of a management board and a supervisory board.

The management board is in charge of the management and representation of the AG. The members of the management board are appointed and removed by the supervisory board. The supervisory board only monitors the management board and represents the AG in relation to the management board. They have no right to actively instruct the members of the management board. The articles of association may stipulate that specific actions of the management board however require the prior approval of the supervisory board.

The supervisory board must consist of at least three members or a higher number divisible by three. The shareholders elect the members. If the AG has more than 500 employees, one third of the members of the supervisory board have to be elected by the employees. The shares in AGs can be certified.

In contrast to the GmbH, AG shares need not be transferred in notarised form and can be traded on stock exchanges.

Asset purchase or share purchase

Investors may acquire a domestic business by purchasing assets by way of singular succession (asset deals), or by purchasing shares in a company (share deals).

Asset deals

An asset deal provides the purchaser with the opportunity to buy only those assets actually desired, and leave unwanted assets behind such as environmentally contaminated real estate and, in many cases, unwanted liabilities. Therefore, asset deals are usually used when acquiring businesses from distressed or insolvent entities.

However, under German law, there are some liabilities that cannot be avoided and pass to the buyer in an asset deal – except under certain circumstances – at an asset transfer. For example, liabilities with respect to existing employment contracts and several tax liabilities cannot be disclaimed. However, certain exceptions apply to this rule in case the assets are purchased from insolvent entities. Also, certain liabilities are taken over if the acquired commercial business is continued under the same name. However, such liabilities could usually be disclaimed.

The acquired tangible and intangible assets, including goodwill, are to be capitalised at their fair market values. For tax purposes, goodwill is amortised over a 15 year period. All other assets are depreciable over their useful life. Tax losses and other attributes are not transferred in an asset deal. Asset purchases of a business or a division (branch of activity) are generally not subject to German VAT. Purchases of shares in a corporation are tax exempt.

There is no stamp duty in Germany. However, the acquisition of property in an asset purchase is subject to real estate transfer tax on the purchase price allocated to the property. The real estate transfer tax rate is generally 3.5% (which can go up to 5% depending on the federal state in which the real estate is located). Furthermore, one has to consider notary’s fees, which apply for the notarisation of the agreements by which the real estate is transferred. The amount of fees depend on the value of the real estate and is determined by a statutory fee scheme.

Share deals

Share deals are often used in straight forward M&A transactions relating to operating entities.

When buying a business, it is necessary to understand the legal form in which it is conducted. A corporation (AG, GmbH) is subject to corporate income tax (CIT; since 2008, 15%), solidarity surcharge (5.5% of the corporate tax), trade tax (TT; approximately 14%), and value-added tax (VAT; 19% standard rate).

In Germany, tax losses may be carried forward indefinitely for both trade tax on income and personal or corporate income tax purposes. Personal or corporate income tax losses may also be carried back to the previous fiscal year, up to a maximum of €511,500 (US$682,000).

The use of tax loss carry-forwards is restricted by a minimum taxation scheme. Only €1 million plus 60% of the taxpayer’s current year income in excess of €1 million can be offset against tax loss carry-forwards.

In line with the so-called change of control rules, tax loss carry-forwards are in principle forfeited if more than 50% of shares are acquired (pro rata forfeiture if shares of more than 25%, but less than 50% are acquired). The rules apply to any direct or indirect change in the shareholder structure. As an exception, tax losses can be preserved up to the amount of the domestic built-in gains of the loss company.

Real estate transfer tax is triggered when at least 95% of the shares in a company are acquired by one tax payer, or at least 95% of the interests in a partnership owning real estate located in Germany are transferred, directly or indirectly. For partnerships, any direct or indirect share transfers within a five-year period are added together for this 95% test.

Indemnities and warranties

In a share acquisition, the purchaser is taking over the target company together with all of its liabilities, including contingent liabilities. The purchaser will, therefore, normally require more extensive indemnities and warranties than in the case of an asset acquisition.

According to the German Civil Code, a purchaser forfeits his/ her rights and guarantee claims with respect to a defect – of which he is unaware – if gross negligence is involved, unless the defect was intentionally and maliciously kept secret by the seller. The non-performance of due diligence prior to the acquisition of an entity does, however, not generally result in the purchaser being grossly negligent. This would only be the case if the purchaser were not to perform due diligence despite obvious defects of the target or suspicious facts. The purchaser’s decision on whether or not to perform due diligence thus depends on an assessment of the individual circumstances.

In contrast, the vendor may have a pre-contractual duty to inform the purchaser about certain defects of the target according to the German law principle of culpa in contrahendo. This principle implies that a party with important information to which the other party does not have access, must share it with the other party so that it can contract with sufficient knowledge of the facts. The extent of such information duty again depends on the individual case, in particular the value or significance of the transaction.

However, sellers who are usually reluctant to give extensive guarantees regularly invite the purchaser to make his own inquiries in the company. They provide him/ her with information with the intention not to be held liable for risks and defects that were known by the purchaser when making the acquisition. Therefore, due diligence has become market standard for German acquisitions such as in other countries.

Acquisition vehicle

A foreign purchaser may invest into a German target through different vehicles. The tax implications of each vehicle may influence the choice.

Local holding company

A German holding company is typically used when the purchaser wishes to ensure that tax relief for interest on acquisition financing is available to offset the target’s taxable profits within a tax consolidation scheme.

Dividends and capital gains derived by a resident corporate shareholder are essentially 95% exempt from corporate income tax irrespective of the participation quota, the holding period, and the source (domestic or foreign). For trade tax purposes, the 95% exemption of dividend income only applies if the investment

accounts for at least 15% of the share capital or an equivalent participation quota in the assets from the beginning of the respective calendar year.

Non-resident intermediate holding company

A non-resident intermediate holding company may be an option if the country of residence of the investor taxes capital gains and dividends received from abroad. An intermediate holding company resident in another territory could be used to defer this tax and take advantage of a more favourable tax treaty with Germany.

For a German corporate subsidiary, dividend distributions are subject to withholding tax (WHT) at a rate of 25%, increased to 26.38% by a 5.5% solidarity surcharge. The dividend WHT may be reduced to 15.83% if the foreign parent company is not domiciled in a country that has a tax treaty with Germany. If there is a double tax treaty (DTT), or the EU-parent-subsidiary directive (EU-PSD) applies, the WHT may be reduced to tax treaty rates or to zero under German domestic tax law. This is provided the foreign parent company meets the substance requirements of the German anti-treaty shopping rules.

In principle, a capital gain on disposal of the investment in the German company is subject to tax in Germany under German domestic tax law. Capital gains tax is mitigated a) by the German participation exemption rules for corporate shareholders, which principally provide for a 95% tax exemption; or b) by the partial income system for individual shareholders, which provide for a 40% tax exemption if the German company is a corporate entity. A full capital gains tax exemption may be available on the disposal of shares in a company if the DTT gives the right to tax capital gains to the foreign parent company’s country of residence.

Acquisition funding

A purchaser will need to decide whether he/ she wishes to fund the acquisition by means of debt or equity. The main concern will often be to ensure that interest on funding can be set off against the target’s profits to reduce the German effective tax rate.

Debt

The advantage of debt is the potential tax-deductibility of interest (see Deductibility of interest), because the payment of a dividend is not tax deductible at the level of the distributing entity. If debt is used, a decision must be made on which company should borrow and how the acquisition should be structured.

Usually, a German corporation is used as the acquisition vehicle for a share acquisition, funding the purchase price (partly) with debt either from a related party or directly from a bank. Interest expenses are fully tax-deductible for CIT and 75% for TT purposes.

The most common way to deduct interest expenses and to offset them against the target’s taxable income is an acquisition through a leveraged acquisition vehicle, followed by the establishment of a tax consolidation scheme (Organschaft). In an asset deal, such an offset could be automatically achieved if the acquirer of the assets/ going concern is provided with the acquisition funding.

Deductibility of interest

The so-called earnings-stripping rules limit the deductibility of net interest expenses to 30% of tax EBITDA (earnings before interest, depreciation, and amortisation). This restriction applies to any kind of interest expense whether inter-company financing or third-party debt. The rules apply to net interest expense exceeding €3 million (US$4 million).

Any interest in excess of the 30% threshold is non-deductible. Excess interest may be carried forward to future tax years, but is subject to change-of-control restrictions, which may lead to a forfeiture of interest carry-forwards on a transfer of shares in the respective company. If the net interest expenses will be less than 30% of the tax EBITDA, the unused EBITDA can be carried forward for five years.

Equity

An acquirer may use equity to fund the acquisition. German tax law imposes no capital or stamp duty.

However, Germany would levy 26.375% WHT (including solidarity surcharge) on dividends paid by a German company. The WHT may be avoided through the EU-PSD or reduced under a DTT or under domestic law, provided the applicable conditions, in particular the minimum participation, holding periods, and substance requirements, are fulfilled. Dividend payments are not tax-deductible in Germany.

Final remarks

Economic cooperation between China and Germany has intensified and cross-border investments in Germany have considerably increased over recent years. We can see that more and more Chinese investors come to Germany, and we expect that this trend will continue in the future.

How to invest in Germany successfully is a complex question and can only be analysed and answered on an individual basis. We hope that the article provides you with a clear overview and would like to refer to our publication ‘Investment in Germany’ edited by KPMG Germany for more information. If you are interested in this book or have questions, please write to de-tax@kpmg.com. It will be our pleasure to be helpful for you.

Author biographies

Oliver Dörfler

Partner, KPMG Germany

Oliver Dörfler is a tax partner in the Düsseldorf office of KPMG in Germany. His work covers international corporate taxation with a strong focus on the structuring of in- and outbound investments, reorganisations, M&A, post-acquisition integration and financing structuring. He leads the China tax competence centre.

Dr Holger Lampe

Senior manager, KPMG Germany

Holger Lampe is a senior manager in the Düsseldorf office of KPMG in Germany. He was on secondment in China for more than two years until February 2012. He specialises in M&A transactions with a strong focus on advising Chinese companies on their investments in Europe, as well as German companies on their investments in China. He is a member of the China tax competence centre.

Maximilian Gröning

Partner, KPMG Germany

Maximilian Gröning is one of the founding partners of the German KPMG law firm and head of its Düsseldorf office. He is advising his clients on all kinds of corporate transactions, in particular M&A and

private equity transactions. His work however also covers joint ventures as well as intra group reorganisations. In recent years, he has regularly advised Chinese clients on inbound investments in Germany.

Investments in ASEAN region: Mekong countries and Indonesia perspective

Issue: China Outbound Investment Guide 2012

By William D Greenlee Jr and Vinay Ahuja

DFDL

Foreign Direct Investment (FDI) flows to ASEAN have been increasing since 2002. This upward trend is reflective of increasing interest and confidence of investors in investing and doing business in the region. The Association of Southeast Asian Nations (ASEAN) was formed in 1967 with the signing of the Bangkok Declaration by the five original member countries – Indonesia, Malaysia, the Philippines, Singapore, and Thailand Brunei joined in 1984. Vietnam joined in 1995; Laos and Myanmar/Burma in 1997; and Cambodia in 1999.

Apart from the regional initiatives that have so far been formulated and carried out by ASEAN to increase FDI, each ASEAN member country continues to develop its investment climate in accordance with regionally and multilaterally accepted principles and through new investment measures enacted individually. These individual measures are encouraged by various regional agreements and multilateral bodies to increase the competitiveness of the region in attracting FDI. They include: improvements in the overall investment policy framework; granting of incentives; opening up of sectors for foreign investment; reduction of business costs through lowered taxation; streamlining and simplification of the investment process; and other investment facilitation measures. On the other hand, global competition in international trade poses significant challenges to companies, who must rapidly respond to changing marketplace requirements. It is necessary for firms and investors to know which ASEAN countries offer the most potential for investment.

Nearly all ASEAN countries receive high FDI inflows. For example, Singapore, Thailand, Malaysia, Indonesia and Vietnam have been the largest FDI recipients, together accounting for more than 90% of flows to the sub region. While FDI growth differs considerably between countries, the newer ASEAN member countries in particular (Myanmar, Vietnam, Cambodia and the Lao People’s Democratic Republic) recorded the strongest FDI growth, exceeding 70% in each (World Investment Report). Favourable regional economic growth, an improved investment environment, higher intraregional investments, and strengthened regional integration were key contributory factors.

Reinvested earnings were particularly strong, highlighting the importance of existing investors as a source of FDI. Increased inflows in Vietnam were the result of that country’s accession to the WTO in 2007, as well as greater liberalisation and FDI promotional efforts – particularly with respect to infrastructure FDI. There were higher FDI inflows in extractive industries in Myanmar, in telecommunications and textiles and garments manufacturing in Cambodia, and in agriculture, finance and manufacturing in the Lao People’s Democratic Republic.

The importance of Indonesia

This is the importance of Indonesia to ASEAN, rather than one man’s leadership or Indonesia’s size alone. There is no sign that the basic policy orientation of Indonesia or its fundamental commitment to regionalism has diminished despite the political changes that the country is undergoing.

At the same time, after the turmoil of 1965 and 1966, Indonesia made clear its continued adherence to a national policy of ethnic, racial and religious tolerance, and of unity in diversity that had kept, and continues to keep, the nation together. This had a reassuring effect on its would-be partners in ASEAN, all of whom were blessed with ethnic diversity and threatened by ethnic division. Moreover, Indonesia, in its wisdom, allowed itself to wield its already considerable weight in the world in the new context of ASEAN. In this way, ASEAN has been able to avoid the problems of some other regional associations, which are hampered and burdened by the dominance of their largest members. Instead, Indonesia’s international influence, prestige and activism, magnified by its new internationalist posture, were to be placed in ASEAN’s service at the UN, in the Non-Aligned Movement, in the Group of 77 and in other international forums.

With its vast natural resources and bustling population of around 240 million people, Indonesia is being considered as one of the most lucrative investment destinations and fastest growing economies in the world. In comparison to others, Indonesia is third only to China and India among the G20 industrialised and developing nations. Having overcome the Asian financial crisis of the late 1990s, and withstood the worst of the more recent global economic slowdown, Indonesia has shown itself to be a resilient economy whose industries have proven to be one of the most attractive for foreign investors.

Thirteen years ago, Indonesia broke free from three decades of authoritarianism. Today, it has the world’s fourth largest population and is one of Asia’s fastest growing economies. Known as the ‘Asian miracle’ in the 1980s and early 1990s for opening its doors to FDI, Indonesia today is experiencing another kind of miracle: it has emerged as an unusually strong survivor of the international financial crisis. Combined with its growing commitment to sustainable development, the world’s fourth most populous nation is well positioned to spark interest from socially responsible investors. This is particularly true of those interested in investing in climate solutions and biodiversity in a large market. In fact, Indonesia has recovered the investment grade status of its sovereign debt at Fitch Ratings after 14 years. This places the country on the same level as India.

The overall investment climate in Indonesia is very attractive and accessible to foreign investment. The availability of fiscal incentives to attract foreign investors, no limitation on value of investment, the possibility for foreign investors to wholly own their investment in almost all sectors, as well as a simplified investment approval process are just some of the advantages for foreign investment in Indonesia. As a member nation of the ASEAN countries, Indonesia is located on the crossroads of two great continents, namely Asia and Australia, and in between the Indian and Pacific Oceans. It offers comparative advantages to investors, such as (i) a vast, fertile country endowed with rich and diversified natural resources, such as agriculture, plantation, fisheries, mining, oil and gas; (ii) a large population; (iii) a strategic location between vital international sea communication lines; (iv) political stability; and (v) a more democratic country.

Indonesia is also making real efforts to increase accountability in its energy and resources sector by moving to become a candidate country in the Extractive Industries Transparency Initiative (EITI). EITI is a commitment to transparency on transactions involving natural resources.

The New Investment Law No.25 of 2007 (April 26 2007) (New Law 07) introduces new issues such as corporate social responsibility and a dispute settlement mechanism. New Law 07 also introduces one door integrated services pursuant to a licensing process. The process runs from the application stage until the issuance of all necessary documents. Moreover, New Law 07 gives regencies and cities the right, authority and obligation to regulate and self manage investment approvals taking into account the interests of the local communities. New Law 07 also offers equal treatment of every investor by bureaucracy reform in investment services and fiscal incentives. It shows the efforts of the government to make the investment climate more transparent.

Legal establishment: Foreign investors may be a corporate entity or an individual. In some sectors, investors can own all shares of a foreign investment company (PT Penamanan Modal or PT PMA) with

certain exceptions. However, the said PT PMA must divest a portion of shares to an Indonesian party within 15 years after commencing commercial operations. On the other hand, the foreign investor can establish a joint venture with Indonesian parties. The Indonesian parties at least own 5% at the time of establishment. In that case, the foreign company is not required to divest its shares to Indonesian parties within 15 years. The foreign investors also must check the Negative List for the minimum percentage that can be held by foreigners in a company in certain sectors in Indonesia. A PT PMA is generally granted a 30-year period to operate after its legal formation. During this period, if an additional investment to the original were undertaken, then a further 30-year period would be granted for the project. It is also possible for third term to be granted for another 30 years. There are no minimum or maximum total investment (debt plus equity) requirements. However, investors in the manufacturing sector typically are expected to have a debt to equity ratio of 3:1 or less, while those in the agricultural or mining sectors may have ratios of 6:1 or greater. The Capital Investment Coordinating Board (BKPM) is the central authorised body receiving, reviewing and approving investment capital applications as well as monitoring approved projects. The BKPM’s duties under the law include coordinating and implementing one stop integrated services by developing an investor roadmap and providing consultation services to investors seeking capital investments. Although the law contains no provision authorising BKPM to approve investments, BKPM approval is needed in order for investors to receive immigration facilities or investment incentives.

Foreign investors must submit an application form – the so-called Model I – to BKPM. Various attachments must be submitted together with Model I including (a) a copy of the investors’ articles of association (or passport/identification card in the case of individuals), (b) flowchart of the production process or description of services, (c) power of attorney if the application is not signed and submitted by the investors themselves. After obtaining BKPM approval, the applicant can establish a limited liability company by executing a Deed of Establishment (DoE) in the notary public. Then, this DoE shall be submitted to the Ministry of Laws and Human Rights (MoLHR) for approval. One of the requirements to obtain MoLHR approval is that investors must submit proof that they have paid the issued capital. A company also has the obligation to register in the Company Registry maintained by the department of trade. Moreover, a company must apply the letter of domicile to sub district (Kelurahan). And it must obtain a taxpayer registration number (NPWP) and a taxable entrepreneur number (NPPKP) from the relevant tax office. After a company has been established, it must proceed immediately to take the following post formation steps:

Corporate housekeeping: A first meeting of shareholders, directors and commissioners must be held. The General Meeting of Shareholders (GMS) should confirm the appointment of the members of the Board of Commissioners (BoC) and the Board of Directors (BoD). The GMS, together with BoD and BoC, ratify all actions taken in PT PMA’s name prior to MoLHR approval of the DoE. Moreover, the share certificates, the share registry and the special register shall be prepared too. After obtaining a BKPM approval, a PT PMA has the obligation to submit a report of capital investment activities (Laporan Kegiatan Penanaman Modal or LKPM) to BKPM. A PT PMA that has not yet obtained a permanent business licence (IUT) shall submit a semi-annual report of LKPM to BKPM. A PT PMA that has obtained IUT must submit an annual LKPM. This report is in the standard form of BKPM. Furthermore, the copies of LKPM also must be delivered to the relevant government institutions, such as the department of trade, Bank Indonesia or the regional office of the relevant technical department. The initial investment approval serves as a temporary operating licence until a PT PMA reaches the stage of commercial production. At that time, a PT PMA shall apply for an IUT (permanent business licence) to BKPM. Upon issuance of the IUT, a PT PMA is authorised to conduct its activities for a 30-year period.

A PT PMA must apply for an expatriate manpower utilisation plan (RPTKA or Rencana Penggunan Tenaga Kerja Asing) from the Department of Manpower (DoM) in order to employ expatriates. The RPTKA serves as a basis for the expatriate to obtain their temporary stay permits (KITAS) and work permit (IKTA). DoM requires a PT PMA to employ three local employees for every expatriate it employs. A company with more than 10 employees must prepare company regulations and register with the DoM. If a company has a labour union, then the collective labour agreement is required to be registered in the DoM. Moreover, Indonesian law recognises both indefinite-term employment agreements and definite-term employment agreements. Before a company hires employees, it shall consider the advantages and disadvantages of these types of agreements.

Importing goods: A PT PMA wishing to import capital goods/ raw materials is required to have a limited importer licence number (Angka Pengenal Import Terbatas or APIT). The APIT is obtained through BKPM. Goods imported under an APIT are subject to a reduced withholding tax of 2.5% compared to the normal rate of 7.5%. This tax is a prepayment of income tax and is fully creditable. Under some conditions, an exemption from this tax is possible. A PT PMA may obtain favourable import duty reductions on imported production equipment, spare parts and raw materials that are not locally available. A PT PMA must submit a master list application to BKPM or the Customs and Excise Office (in certain circumstances). After the master list is approved, then a PT PMA receives an import duty reduction on the item listed in the letter to a maximum 5% duty rate.

Although 100% ownership by foreign investors is allowed, day to day management by the foreign entity requires significant familiarity with Indonesian regulations, industry networks and business culture. A PT PMA must have a minimum of two managers/ shareholders, and at least one director and chairman.

Conclusion

With the world’s ‘stronger’ economies in distress, ASEAN should do better if the business sector looks within the region for investment and trade. Factually, Indonesia needs at least US$140 billion in investment over the next five years to upgrade infrastructure and meet its goal of 6-7% annual growth. Two-thirds of that funding will have to come from foreign investment. It is this growing population of would-be consumers that is helping drive Indonesia’s economy – which is much less dependent on exports than other emerging markets – and is forecast to do so for years to come.

For the last few years, ASEAN has been actively promoting foreign investment and has thus taken several key initiatives. In addition to the formation of a free trade area, the region aims to achieve an ASEAN Economic Community (AEC) by 2015. This promotes ASEAN not only as an integrated market but also as a single investment destination. Various tools such as the ASEAN Comprehensive Investment Agreement and the ASEAN Industrial Cooperation have been in place for the ease of doing business. They allow businesses to take advantage of the value chain of the production within the region.

Author biographies

WILLIAM D GREENLEE, JR

Partner; Managing Director, Laos; Head of DFDL China Desk

William’s practice focuses on M&A and project finance and includes negotiating, structuring, documenting and managing large private equity and opportunity fund companies and transactions. William holds a BA degree from the University of Oregon in Asian Studies with a minor in East Asian Literature and Juris Doctor from the University of San Francisco, California. William is a member of the State Bar of California, State Bar of Nevada, State Bar of California International Law Section and the Inter-Pacific Bar Association. He speaks English, Mandarin, Thai and Bahasa Indonesian.

VINAY AHUJA

Senior Adviser, Regional M&A Practice Group, Head DFDL India Desk

Vinay specialises in investment laws, general corporate laws and legal and practical aspects of corporate and commercial cross border transactions in the ASEAN region. His transactional and advisory experience includes advising and representing various multinational clients in transactions related to energy, oil and gas, information technology, real estate, consultancy, hospitality, agro, power, automotive, mining, telecommunications, logistics and infrastructure. In addition to Vinay’s transaction and advisory experience, he also has basic experience in arbitration and dispute resolution. He is a gold medalist graduate from Symbiosis Law School, University of Poona, India and also leads the DFDL India desk. Vinay is a member of Bar Council of India, Bar council of New Delhi, International Bar Association and Inter-Pacific Bar Association. He speaks English, Hindi, Punjabi, Sindhi and Urdu.

US: Outbound China M&A and investment

Issue: China Outbound Investment Guide 2012

By Stephen Harris, Craig Roeder, Brian Burke, Stanley Jia & Danian Zhang

Baker & McKenzie

The stress and trauma induced by the global financial crisis in 2008 and 2009 gave way to recession and wrenching efforts to wean the global economy of excess leverage in 2010 and 2011. What will 2012 bring and what can we expect for the US M&A markets? Continuing uncertainty may be the only reasonable expectation one can have given what has transpired over the last four years. In spite of this uncertainty, there will to be opportunities to buy quality companies while domestic private equity and strategic buyers remain highly selective and, to some degree, resistant to price levels that appear to be increasing for strongly performing companies. This may give buyers with a longer-term return horizon, or access to higher growth markets such as China, the opportunity to acquire attractive targets that support a global growth strategy.

Historically low interest rates, easing credit availability, growth in money supply, a relatively strong economic showing by the US in the last quarter of 2011 and piles of cash sitting in the coffers of strategic investors and private equity funds would seemingly create favourable conditions for a robust M&A market. Offsetting these positive elements, however, are the global macroeconomic picture and the unsettled political and fiscal environment in the US. The debt crisis continues in Europe, the IMF warns of risks to the global economy, Congress and the President spar with respect to the budget and tax reform as election year rhetoric flairs, and the housing markets continue a slow and painful effort to recover from the profligate lending environment that drove housing prices to unsustainable levels. This has led to volatility in the public markets and reports of substantial pricing spreads between buyers and sellers who have challenges in setting rational expectations around pricing in a very uncertain market. The result is that

transactional activity is well below the pace experienced in the first half of the last decade, and it appears unlikely that domestic demand will increase dramatically given the current political and economic environment.

In spite of the uncertainties, the quantum of US inbound investment has improved year over year and it appears that buyers from Europe and Asia Pacific in particular are taking advantage of the drop in domestic demand and are seeking attractive targets in the US. As a subset of potential buyers wait for improved market conditions, those buyers with a long-term perspective, capital resources and access to high growth markets will be well positioned to meet the price expectations of sellers of strong companies with good growth potential and technologies or products that can be readily migrated to new markets. Competition from domestic purchasers is likely to increase as the global economy improves and some clarity is brought to the current fiscal debate in the US. As Chinese companies consider the opportunities in the US for strategic acquisitions, careful consideration should be given to the regulatory framework attendant to acquisitions in the US. This is particularly important for Chinese state owned enterprises that have an interest in acquiring companies with businesses that involve national security or critical domestic infrastructure.

Antitrust

Proposed acquisitions of entities that are based or otherwise have a presence in the US may raise potential issues under US antitrust laws. Section 7 of the Clayton Act (15 U.S.C. § 18 (2006)) is the US statute that principally governs mergers and acquisitions, and it precludes any merger or acquisition – horizontal, vertical or conglomerate – that may substantially lessen competition or tend to create a monopoly. In order to facilitate the enforcement of that statute, transactions of a certain size having a sufficient nexus with the US must be notified to and cleared by the US antitrust agencies prior to their consummation.

In the US, this premerger notification requirement is governed by the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (15 U.S.C. § 18(a) (2006)) (the HSR Act), and the detailed regulations contained in the Code of Federal Regulations at 16 C.F.R. §§ 801.1 et seq. (2012) (the Regulations). The US governmental agencies charged with reviewing any notifications submitted under the HSR Act are the Federal Trade Commission (FTC) and the Antitrust Division of the Department of Justice (DOJ). These two US antitrust agencies have concurrent jurisdiction over merger control in the US. The purpose of the HSR Act is to provide the US antitrust agencies with an opportunity before transactions are consummated to analyse the extent to which the notified transactions may threaten anticompetitive harm within any market i.e., violate Section 7 of the Clayton Act.

HSR Act notification thresholds

A proposed transaction requires notification under the HSR Act, where either the acquiring or acquired party is “engaged in [US] commerce or in an activity that affects [US] commerce”, one of the statutory notification thresholds (identified below) is met, and no exemption is applicable.

There are two statutory thresholds in the HSR Act, each of which is adjusted annually based upon changes to the gross national product of the US. The currently effective threshold figures are reflected below. If either one is satisfied then the transaction must be notified unless an exemption applies.

1. The transaction is valued in excess of US$272.8 million; or

2. The transaction has a value in excess of US$68.2 million and either

(a) The worldwide assets or net sales of the acquiring party equals or exceeds US$136.4 million, and the worldwide assets, or net sales if a manufacturer, of the acquired party equals or exceeds US$13.6 million; or

(b) The worldwide assets or annual net sales of the acquiring party equals or exceeds US$13.6 million, and the worldwide assets or annual net sales of the acquired party equals or exceeds US$136.4 million.

In short, absent the application of an exemption, an HSR filing is required if either (a) the value of the transaction exceeds US$272.8 million; or (b) the value of the transaction exceeds US$68.2 million, and the parties satisfy either one of the tests set forth in 2(a) or 2(b) above.

HSR filing requirements

Once it is determined that a proposed transaction triggers a notification obligation under the HSR Act, all acquiring and acquired person(s) must submit independent HSR filings to both the DOJ and the FTC. While there is no deadline for submitting an HSR filing, a transaction requiring notification under the HSR Act cannot be closed until HSR Act clearance is obtained.

Under the HSR Act, the acquiring party is responsible for payment of the applicable filing fee – absent some negotiated sharing arrangement between the parties. The amount of the filing fee is determined by the ‘value’ of the voting securities, assets, or non-corporate interests to be held as a result of the acquisition that is being notified. The table below identifies the current HSR filing fee thresholds.

HSR filings must include specific information regarding the structure and details of the notified transaction, as well as the revenues derived by the parties to the notified transaction from sales made in or into the US during the most recently completed fiscal years. Information regarding both parties’ subsidiaries, minority shareholders, and shareholdings, along with affiliates of the buyer (if any) also have to be included in the HSR filings. Additionally, the parties must provide certain documents – to the extent they exist – that address subjects such as markets, market shares, competitors, and expansion into new markets. Separately, offering memoranda and documents evaluating potential synergies or efficiencies that may be realised by the proposed transaction also may have to be included. The content of these documents can and frequently do influence the level of scrutiny that notified transactions receive.

HSR review process

Generally, the applicable HSR waiting period commences upon submission of complete HSR filings by parties to the notified transaction and payment of the appropriate filing fee. The typical HSR waiting period is 30 calendar days. A shorter 15-day waiting period applies to transactions structured as all-cash tender offers, and acquisitions from a debtor-in-possession or trustee in bankruptcy. If the final day of the HSR waiting period falls on a weekend or holiday, then it is automatically extended until the next business day. Shortly after the HSR filing is submitted, staff members from FTC and DOJ will review the filing and determine whether any substantive antitrust concern is presented by the proposed transaction. If such an issue is not presented, the transaction will receive HSR clearance. That clearance decision may come either in the form of an affirmative grant of early termination (if requested) before the expiration of the applicable waiting period or by allowing the applicable waiting period to expire without taking any action.

Should potential substantive issues be perceived, the filings will be referred to staff within the agencies having the most experience with the products/ services or parties and industry involved in the notified transaction. To determine which US antitrust agency will be responsible for conducting any substantive review of notified transactions, the agencies have implemented a ‘clearance process’. In essence, this process results in the agency with the most experience and expertise with the subject matter of, and/ or parties to, the transaction being responsible for conducting the substantive review of the transaction. The clearance process can be resolved in a matter of days or weeks, depending upon the level of relevant experience at each agency. If both agencies believe the transaction should be cleared to them for substantive review, then they negotiate among themselves to reach a resolution. Once a transaction has

been cleared for review to either the DOJ or the FTC, the other agency has no substantive role in the review of that transaction.

Once a transaction is cleared to the DOJ or FTC for substantive examination, the reviewing agency may send the parties requests for additional materials in order to assist it in determining the nature and extent of the competitive issues presented by the proposed transaction. While compliance with these waiting-period inquiries is voluntary, it is beneficial for the parties to respond as the responses may narrow the scope of any further investigation of the transaction and possibly eliminate entirely any concerns perceived by the reviewing agency. In addition to making requests of the parties, the reviewing agency frequently will contact third parties during the HSR waiting period to solicit their views on the potential competitive impact of the proposed transaction.

If the responses to the reviewing agency’s waiting-period inquiries and any reactions obtained from third parties do not resolve the agency’s competitive concerns regarding the transaction, then the agency can extend the HSR waiting period by issuing a detailed request to each party requiring the production of additional information and documents related to the overlapping lines of business involved in the transaction (a Second Request).

Should a Second Request be issued, the initial HSR waiting period is extended until both parties certify that they have substantially complied with the Second Request and the reviewing agency has had an additional period (again, usually 30 days) to review the competitive implications of the transaction. Parties frequently grant extensions to this extended waiting period e.g., in the form of a ‘timing agreement’, which often are sought by the reviewing agency shortly after the Second Request is issued. These ‘timing agreements’ set out a schedule for conducting and concluding the investigation. If agreed to, ‘timing agreements’ supersede the timeline set out in the HSR Act.

Second Requests are very burdensome, and complying with them often takes several months. Parties typically negotiate with the reviewing agency to narrow the scope of the Second Request – modifications to the Second Request may be included in any timing agreement. Unresolved disputes between the parties and the staff of the reviewing agency regarding the scope of the Second Request may be appealed to the management of the reviewing agency.

Most transactions that are subject to a Second Request require or involve some type of enforcement action by the reviewing agency. Nevertheless, there are essentially three possible actions available to the reviewing agency to resolve a Second Request investigation. Prior to the expiration of the extended period after the issuance of a Second Request, the reviewing agency may 1) terminate the investigation, 2) file suit in federal court to enjoin completion of the transaction, or 3) negotiate a settlement with the parties that would solve the perceived anticompetitive problems but allow the transaction to proceed. Most settlements require a divestiture to a buyer approved by the reviewing agency. Alternatively, the parties may decide to abandon the transaction rather than litigate against a challenge by the reviewing agency or accede to the reviewing agency’s settlement demands. Any of these results may occur prior to the parties’ substantial compliance with the Second Request.

Substantive standards for conduct of US antitrust analysis of mergers

The FTC and the DOJ, in August 2010, jointly released revisions to the existing Horizontal Merger Guidelines (2010 Guidelines) that replaced the 1992 Merger Guidelines. The 2010 Guidelines outline the principal analytical techniques, practices and tools used by the US antitrust agencies in evaluating the potential competitive effects of mergers and acquisitions involving actual or potential competitors. The US antitrust agencies apply these 2010 Guidelines in conducting their substantive review of transactions, whether notified under the HSR Act or not.

The 2010 Guidelines do not represent a dramatic departure from prior enforcement practice, but do provide insight into the analytical approaches and tools relied upon by the agencies. Notably, the 2010 Guidelines

describe a much less formulaic approach to merger review than the 1992 Guidelines. The 1992 Guidelines specifically set forth a five-step analytical process for determining whether to challenge a merger beginning with market definition and concluding with an assessment of the efficiencies resulting from the transaction and the likelihood that absent the merger, either firm would be likely to fail. The 2010 Guidelines, by comparison, state that “merger analysis does not consist of uniform application of a single methodology”. Instead, they provide a description of the evidence – such as the results of competitive bidding processes – and the techniques – such as ‘critical loss analysis’ that the agencies may rely upon when evaluating whether a transaction may harm competition. While the agencies, as a practical matter, already had largely abandoned the formulaic process outlined in the 1992 Guidelines, the 2010 Merger Guidelines make explicit the more holistic approach to merger review currently practiced by the agencies.

In general, the 2010 Guidelines deemphasise the role of and detail a less rigid approach to market definition. They give less significance to traditional factors used to define markets, e.g., product interchangeability and elasticity of demand, and provide for greater emphasis on the predicted competitive effects of a merger.

The 2010 Guidelines also emphasise the significance of economic analysis. This includes ‘critical loss analysis’, mentioned above, through which economists seek to identify whether the imposition of a price increase on one or more products in a ‘candidate’ market would raise or lower a company’s profits. Additionally, the 2010 Guidelines describe the ‘upward pricing pressure’ test, in which an assessment is made of the incentive “the merger gives the merged entity … to raise the price of a product previously sold by one merging firm and thereby divert sales to products previously sold by the other merging firm, boosting profits on the latter products”. The agencies note that, in some cases, they may attempt to quantify the degree to which sales will be diverted from one product to another in the event of a price increase, thereby arriving at a diversion ratio. If the diversion ratios are high, the agencies will be inclined to conclude that there is a greater likelihood of anticompetitive effects from a proposed merger than if the ratios were low.

The 2010 Guidelines, like the prior iterations, are not binding on US courts, and the agencies’ analytical approach to merger analysis has not been entirely well received by courts that have heard merger challenges brought by the US antitrust agencies since the issuance of the 2010 Guidelines. See, for example, FTC v. Laboratory Corporation of America, 2011 US Dist. LEXIS 20354, at *45 (C.D. Cal. 2011) (finding that market definition was “the key to the ultimate resolution” of the case and rejecting the FTC’s alleged definition); and FTC v. Lundbeck, 650 F.3d 1236 (8th Cir. 2011) (upholding rejection of FTC’s challenge because the products of the parties were not in the same relevant market as alleged by the FTC); but see United States v. H&R Block, Inc., 2011 US Dist. LEXIS 130219, at *1 (D.D.C. 2011) (finding proposed combination in violation of Section 7 in market for digital “do-it-yourself tax-preparation software). This likely is due, at least partially if not entirely, to the well-established case precedent that was developed in reliance on the analytical framework contained in the prior version of the Guidelines.

Nevertheless, the 2010 Guidelines will be used by the US antitrust agencies in conducting their merger investigations, the vast majority of which are resolved without litigation before a judge. As a result, parties to transactions presenting material competitive overlaps must be prepared to deal with and confront the new approach.

Enforcement of HSR rules

Violations of the reporting and waiting-period requirements of the HSR Act are punishable by civil fines of up to US$16,000 for each day of non-compliance. These include consummating a transaction without making the required filing, providing incomplete or inaccurate information in the filing, and transferring control over all or some portion of the target business to the buyer prior to the expiration of the HSR waiting period (i.e., ‘gun jumping’). Additionally, for extreme violations in transactions that present substantive antitrust issues, the US antitrust agencies may seek disgorgement of profits and/ or rescission of the transaction.

Early antitrust planning is crucial

Antitrust issues presented by proposed transactions should be examined early on, if not at the outset, to ensure that appropriate time and resources are dedicated to resolving those issues within the desired timeframe. Involving antitrust counsel in the target-selection process may enable the attainment of similar, if not identical, strategic commercial goals through the acquisition of a target that presents lower US antitrust risks. For transactions presenting significant competitive overlaps in the US, it is advisable to retain early not only antitrust counsel but also an economic consultant. Such early retention provides the opportunity both to receive informed advice regarding antitrust risks presented by the proposed transaction and to begin gathering the information that will be required to respond within the desired timeframe to inquiries anticipated from the US antitrust agencies.

Understanding US antitrust risks at the early stages also will provide an opportunity to consider whether it may be advisable to approach one of the US antitrust agencies in advance of the submission of any required HSR filing. Pre-filing approaches can be helpful by limiting the scope of any substantive review of the transaction and may influence which agency would be responsible for conducting any such review. Moreover, being knowledgeable of the US antitrust risks presented by the proposed transaction can inform the negotiation of certain terms in the purchase and sale agreement, namely those pertaining to the allocation of US antitrust risk.

Having a thorough grasp of both the merger review process in the US and the potential antitrust issues presented by proposed transactions that present potential antitrust issues is imperative. Otherwise, there is a risk that the process and/ or issues will present obstacles that may threaten the viability of the transaction.

National security

The Exon-Florio provision – as amended in 2007 by the Foreign Investment and National Security Act of 2007 (FINSA) – grants the US President broad discretionary authority to investigate the impact on US ‘national security’ of mergers, acquisitions and takeovers proposed by or with foreign persons that could result in foreign control of a US business or certain US assets (a so-called covered transaction). The Committee on Foreign Investment in the United States (CFIUS or Committee), chaired by the Department of the Treasury, is the US Government’s inter-agency committee serving the President, charged with implementing the Exon-Florio/ FINSA review process. Other permanent members of CFIUS include the US Attorney General and the Secretaries of Homeland Security, Commerce, Defence, State and Energy – and as non-voting, ex-officio members, the Secretary of Labor and the Director of National Intelligence.

In addition to the members specified in the Exon-Florio amendment, President Bush designated the US Trade Representative and the Director of the Office of Science and Technology as members of CFIUS. Other Executive departments/ agencies can be added on a case by case basis as the President deems appropriate. The President also has designated the Director of the Office of Management and Budget, Chairman of the Council of Economic Advisors, Assistant to the President for National Security Affairs, Assistant to the President for Economic Policy and Assistant to the President for Homeland Security and Counterterrorism to ‘observe, and as appropriate, participate in’ CFIUS activities. The Secretary of the Treasury designates a lead agency or lead agencies to have primary responsibility over a CFIUS review.

Unlike the HSR Act, the CFIUS notification process is entirely voluntary, does not require a filing fee, and has no mandatory waiting period before a transaction can close. In determining whether to voluntarily notify a transaction to CFIUS, it is helpful to assess the risk that CFIUS could compel a review and investigate the transaction on its own initiative. If an investigation is undertaken post-closing, it could potentially result in the transaction being undone.

In assessing the risks of the proposed transaction, questions arise as to whether the proposed deal is a covered transaction that is subject to review. The proposed transaction must result in ‘control’ that implicates the ‘national security of the US’. Under CFIUS’s regulations, the term ‘control’ means the

‘power, direct or indirect, whether or not exercised, through the ownership of a majority or a dominant minority of the total outstanding voting interest in an entity, board representation, proxy voting, a special share, contractual arrangements, formal or informal arrangements to act in concert, or other means, to determine, direct, or decide important matters affecting an entity’. The regulations enumerate a list of specific examples of ‘control’, however, the test is broad and there is no bright-line rule.

The term ‘national security’ is not defined under the Exon-Florio Amendment or FINSA, but is expressly construed to include ‘those issues relating to homeland security’. In determining whether a covered transaction threatens national security, the law provides a list of 11 illustrative factors that the President may take into consideration in assessing potential national security risks:

1. The potential effects on domestic production needed for projected national defence requirements;

2. The potential effects on the capability of domestic industries to meet national defence requirements, including the availability of human resources, products, technology, materials, and other supplies and services;

3. The potential effects on the control of domestic industries and commercial activity as it affects the capability and capacity of the US to meet the requirements of national security;

4. The potential effects on sales of military goods, equipment, or technology to any country (a) identified by the Secretary of State as supporting terrorism, missile proliferation or chemical and biological weapons proliferation, or (b) identified by the Secretary of Defense as posing a potential regional military threat to the interests of the US, or (c) listed as supporting nuclear proliferation;

5. The potential effects on US international and technological leadership in areas affecting US national security;

6. The potential effects on US ‘critical infrastructure’, including major energy assets; FINSA defines ‘critical infrastructure’ as ‘systems and assets, whether physical or virtual, so vital to the US that the incapacity or destruction of such systems or assets would have a debilitating impact on national security’;

7. The potential national security effects on US ‘critical technologies’;

8. Whether the transaction involves control by a foreign government;

9. Whether the subject country adheres to nonproliferation controls, cooperates with the US in counter-terrorism efforts, and whether the transaction creates a potential for transshipment or diversion of technologies with military applications;

10. The long-term projection of US requirements for sources of energy and other critical resources and material; and

11. Other factors determined to be appropriate, generally or in connection with a specific review or investigation.

As CFIUS does not issue advisory opinions as to whether a transaction might raise national security issues, parties to such transactions are encouraged to consult and negotiate with the Committee prior to filing. This will ensure that any review will proceed as efficiently as possible. If a review is in order, CFIUS’s regulations set forth a detailed set of approximately 50 questions that must be answered, which include a description of the transaction, timelines, assets or businesses to be acquired and detailed background regarding both parties. This formal notification, which must be certified by both parties, forms the basis of the parties’ notice of the proposed foreign acquisition to CFIUS. Once the Committee receives and accepts

a formal notice of a proposed transaction, it has 30 days to determine whether a full investigation is warranted. If it is not, a letter concluding review is issued to the parties to the transaction. Most transactions are concluded within the initial 30 day period.

If the initial review of a covered transaction results in a determination that: (1) the transaction threatens to impair US national security and the threat has not yet been mitigated; or (2) the transaction would result in foreign government control; or (3) the transaction would result in the control of any US critical infrastructure that could impair US national security and the threat has not yet been mitigated; or if the lead agency recommends, and CFIUS concurs, that an investigation must be undertaken, then CFIUS must conduct and complete within 45 days an investigation of the transaction. Once the 45-day period expires, CFIUS submits a recommendation to the President, and the President has 15 days to make his determination. A party may request voluntary withdrawal of the notice at any time during the review or investigation stage.

The President is authorised to take such action as he considers appropriate to suspend or prohibit any transaction if he finds that a) the foreign interest exercising control might take action that threatens national security; and b) other provisions of the law do not provide adequate authority for the President to act to protect national security. If the transaction has already been consummated, the President may order divestment of assets so as not to impair US national security. Notwithstanding this power, the President has rarely invoked this authority. Failure to notify CFIUS does not preclude future investigation, and transactions that are not reviewed potentially remain permanently open to review and investigation by CFIUS.

Careful analysis of possible CFIUS review is important

FINSA greatly expanded the scope of the Exon-Florio process and, undoubtedly, the broad sweep of FINSA imposes new concerns on industries previously believed to be unaffected by the Exon-Florio process. Moreover, the Exon-Florio/ FINSA process is increasingly politicised and businesses may expect more thorough CFIUS reviews, more investigations, and greater scrutiny by Congress. More deals likely will be subject to CFIUS review and investigation due to a broadened concept of ‘national security’ to include homeland security and critical infrastructure. In 2009, CFIUS conducted a review of 65 transactions and investigated 25; in 2010, those numbers rose to 93 and 35, respectively. This demonstrates the government’s continued focus on investigations into foreign investment that potential pose national security threats. While it is the policy of the US to welcome foreign investment, foreign investors are well advised to carefully assess whether a filing is in order.

Author biographies

Stephen Harris (partner, Washington DC office)

Steve Harris is a renowned antitrust practitioner, with particular expertise in US and international merger reviews, defence of antitrust class actions, and cartel investigations. He is the co-author of the recently published and seminal book on China’s Anti-Monopoly law, Anti-Monopoly Law and Practice in China (Oxford University Press 2011). He is globally recognised as a leading antitrust lawyer and commercial litigator by publications including Chambers USA, International Who’s Who of Competition Lawyers, and PLC Which Lawyer.

Craig Roeder (partner, Chicago office)

Craig A Roeder advises clients, including Chinese companies, in a broad range of industries in connection with domestic and cross-border merger and acquisition transactions, including public company mergers and tender offers, joint ventures and strategic alliance arrangements, public and private securities offerings, securities law compliance and corporate governance, and other corporate transactional matters. Roeder leads the corporate and securities practice in Baker & McKenzie’s Chicago office. He is recognised as a

leading lawyer in mergers and acquisitions in Chambers USA 2011, Legal 500 USA 2011 and International Who’s Who of Mergers & Acquisition Lawyers 2012 and has been named as a 2012 Client Service All Star in a survey of Fortune 1000 corporate counsel conducted by BTI Consulting Group.

Brian Burke (partner, Washington DC office)

Brian Burke is a partner in the Washington DC office of Baker & McKenzie, where he regularly represents clients before the Antitrust Division of the US Department of Justice and the Federal Trade Commission in investigations of proposed mergers and acquisitions and related civil litigation. Burke is the North American representative of the firm’s global merger control taskforce and is the executive editor of the Global Merger Control Manual 9th Edition (Cameron May, 2011), which is the most comprehensive treatise on global merger control.

Stanley Jia (partner, Beijing office)

Stanley Jia’s practice focuses on a wide range of foreign investment projects involving PRC companies, in particular those covering the energy, oil and gas, infrastructure and automotive sectors. Leveraging his in-depth understanding of the workings of Chinese and foreign companies, Jia regularly assists clients in negotiations with government and regulatory bodies in China. His experience also includes working on a significant number of major overseas investments by large Chinese state-owned enterprises into the US and other regions. Jia is ranked among the leading lawyers for corporate/ M&A in China by Chambers Asia Pacific, Chambers Global and Legal 500 Asia Pacific. He is also listed among the top lawyers for projects and energy in Legal 500 Asia Pacific, and for project finance in IFLR1000.

Danian Zhang (partner, Shanghai office)

Danian Zhang’s practice focuses on mergers and acquisitions, and corporate and environmental compliance in the PRC. Ranked among the leading corporate lawyers in China by top legal directories, including Legal 500 Asia Pacific, Asialaw Profiles, Global Counsel 3000, PLC Which Lawyer? and IFLR1000, Zhang advises on inbound and outbound multi-jurisdictional mergers and acquisitions and other corporate matters for both foreign and Chinese companies. These cover a wide range of industries, including metal and mining, automotive, power, energy, chemicals and manufacturing.

China M&A activity on the rise in 2010, forecasts KPMG Global M&A Predictor Hong Kong, 18 January 2010

KPMG International's annual Global M&A Predictor forecasts a substantial increase in deal-making appetite in China for the coming year, due to resilience in the domestic stock markets, rising demand for energy and resources and further consolidation within the consumer and telecom sectors.

KPMG's Global M&A Predictor tracks 12 month forward Price to Earnings (PE) multiples and estimated net debt to earnings before interest, tax, depreciation and amortization (EBITDA) ratios to track and establish the potential direction of M&A activity.

On a Global basis, forward PE ratios are now seven percent higher (at 14.0x for 2010 versus 13.1x for 2009) while net debt to EBITDA ratios are expected to decline by 18 percent from 1.5x to 1.2x. For the ASPAC region (excluding Japan) forward PE ratios are at 35 percent.

In contrast Mainland China exhibits a much higher increase of PE ratios, at 36 percent from 10.6x to 14.4x. This is also significantly higher than 15 percent and 16 percent for Hong Kong and Taiwan respectively. Improving forward PE ratios indicate enhanced deal-making appetite while declining net debt to EBITDA ratios equate to improved deal-making capacity.

Commenting on the China forecast, Paul Chau, Head of M&A Advisory at KPMG Corporate Finance Hong Kong and a partner in the China firm, said: "China is playing catch up. As the world's second largest economy it currently accounts for less than 8 percent of Global deals. In recent months we have therefore seen a surge in M&A activity with corporate-to-corporate leading the way, closely followed by private equity firms."

On the net debt to EBITDA ratios, China net debt to EBITDA ratio declines 18 percent from 1.1x to 0.9x compared with that of 16% for Hong Kong from 0.6x to 0.5x. Taiwan companies included in the KPMG's Global 1,000 Index still sits on net cash and hence the net debt to EBITDA ratio remains negative. AsPac (exc. Japan) meanwhile forecasts a decline of 20 percent from 1.5x to 1.2x.

Paul Chau noted interesting trends across several sectors: "A number of sub-sectors are still fragmented within consumer markets in Mainland China. We have recently seen consolidation in the food and beverage sector due to intensifying competition and stricter regulations. Within the retail sector, we also see consolidation amongst the domestic players due to large overseas entrants in the market and the need therefore to be increasingly cost-competitive. The Chinese Government has also recently announced plans to encourage industry consolidation and restructuring in a number of technology sub-sectors, with a view to creating a home-grown industry leaders in this space," he said.

"In addition, the re-opening of the IPO market in China, including the launch of the Growth Enterprise Market in Shenzhen, has created tremendous momentum in the IPO pipeline, with over 200 companies waiting to be listed in 2010. The availability of exits through IPOS is being reflected in the recent surge in PE deals. We therefore expect to see very strong deal closings in the first half of 2010," he added.

China’s Sany Purchases German Concrete-Pump Maker Putzmeister for Technology and to Expand Beyond China

By Baron Laudermilk

Sany Heavy Industry, run by China’s richest man, and its partner, Citic PE Advisors (Hong Kong) will pay 360 million Euros ($475 million) for Putzmeister Holding, a German concrete-pump maker to enhance its technology and to expand internationally.

Sany Heavy Industry, a construction-equipment maker will by 90 percent of Putzmeister for 324 million Euros, and Citic PE Advisors will buy the other 10 percent. The deal is the largest purchase China has made in Germany, and it will be confirmed on March 1 pending regulatory approval.

The Germany Company, founded by Karl Schlecht, employs 3,000 people and had a profit of 6 million Euros on sales of 560 million Euros last year. The company sold pumps to a company that built Dubai’s Burj Khalifa, the world’s tallest building, and it supplied pumps that helped alleviate the nuclear meltdown in Japan in 2011.

Karl SchlechtFamilienstiftung, Karl SchlechtStiftung, and the shareholders are selling the German company. Bank of America advised Sany during the deal, and Morgan Stanley aided Putzmeister.

Last week Sany Chairman Liang Wengen told reporters at a briefing in Changsha that this deal would make the company more competitive on the international stage. “With this deal, we’ve turned our most competitive international rival into one of us. It also reflects China’s rising position in the world’s construction- machinery industry.”

Professor Gary Herrigel, a professor at University of Chicago, told Invest In that Sany’s acquisition of Putzmeister would make them more competitive in many aspects. “It will certainly be beneficial to Sany, if Sany manages the acquisition competently. It will make Sany competitive in a broader array of market segments (including up market segments) and it will be a tremendous opportunity for Sany to learn in new technological, organizational and market areas.”

This deal is another chapter in Chinese major acquisitions of European firms as the Eurozone stumbles along in economic stagnation with heavy debt. Earlier this month, China’s second largest solar panel manufacturer purchased Germany’s Sunways AG, and Shandong Group-Weichai group acquired luxury-yacht builder Ferritt group. Sany could not let this bargain pass by. Dr. Herrigel said:

“Putzmeister is attractive to Sany because of its technology and its knowledge of global markets.  Chinese companies are buying European firms because the Chinese have cash and a desire to upgrade their presence in manufacturing markets. As long as the price is right and the technological and market benefits continue as they are, the Chinese are likely to continue to compete for these sorts of European properties.”